3.

3
Costs &
Revenues

1
Objectives:
+ In this lesson you will:
Identify different types of costs
 Fixed
 Variable
 Direct
 Indirect/Overheads
Identify revenue streams

2
 Costs
Costs are the charges that an
organization incurs from its
business operations

Think about what you are wearing

right now... What material is it
made of? How many people were
in involved in producing it? How
did it get to the store?
The materials, labor,
transportation, are all examples of
costs.

3
 Fixed costs
Fixed costs of production do not change with the level of
output.

This means that the number of units produced has no

influence on the amount of money the business has to pay. Be aware that these
costs CAN change but
due to reasons other
than the amount
Examples of fixed costs are generally: Rent, produced.
insurance, advertising, etc.

4
Fixed costs
+ The Total Fixed cost line
is represented as a
horizontal line, with the X
axis showing the level of
output and the Y axis
representing the monetary
amount of costs.

5
 Variable Costs
+ Variable costs are the firm's
expenses that change with the level
of output.
+ These costs rise when the number
of units produced increases.
+ Examples of variable costs are:
raw material, wages of
production workers, etc.

6
Variable costs:
+ The Total Variable Cost line
is represented as an upwards
sloping line starting at 0
units and 0 costs.
+ No production = No cost

7
Total Costs
+ Total Costs represent all the
firm´s expenditures.
+ Total Cost = Total Fixed
Costs + Total Variable Costs

Notice the Total Cost line

starts at the (Y) level of the
TFC. This means that even
if there is 0 output, there
are still Fixed costs to pay.

8
Direct Costs
+ Are the expenses that can be explicitly associated with the output
or sale of a product. Examples of Direct costs (sometimes
called cost of goods sold) may be:
 Variable costs such as raw material, production wages, or
 Sometimes some fixed costs such as rent for the production
facility.

9
Indirect/Overhead Costs
+ Indirect costs also called overheads) are costs that are not
directly involved with the production of a good.
+ Examples of indirect costs may be: rent of
premises, administrative costs such as salary of non-production
workers, general insurance, legal costs, etc.

10
Practice:
- Classify the following costs for an ice cream factory: Fixed or
Variable?
Business expense Type of cost F or V?
Newspaper ad
Whole milk
Flavorings
Lease of ice cream trucks
Manager´s salary
Ice cream cones
Rent

11
Revenues

Revenue refers to the income -

money coming into a business from
the sale of goods and services.

Revenue streams refers to the

various sources of revenue for a
business.

12
Total Revenue

+ Total revenue (TR) is calculated by

multiplying the unit price (P) of a
good or service by the quantity sold
(Q), i.e. TR = P × Q.

The Total Revenue line also starts

at the origin, since No sales = No
income/revenue
13
Revenue Streams
+ Are the various sources of revenue for a business. Usually Sales
revenue is the most common form of revenue stream for businesses.
+ Most businesses have more than one revenue stream Examples of
various revenue streams include:
• Memberships or subscriptions
• Royalties
• Transaction fees
• Donations or gifts
• Interest from investments
• Dividends from other companies
14
Let's practice:
In pairs
• Choose one of the businesses
on the right and list its
+ Hotel
possible costs. + Plastic chair factory
• Classify the costs into: Fixed
+ Coffee house franchise
or Variable
• Identify its main revenue + Bank
stream + Oil extracting company
• Present your ideas to the class
+ International law firm

15
Now let's calculate:
A small bakery is creating a new
cookie. The ingredients cost
about $0,30 per cookie, the fixed
costs are $ 200 per month and Total variable cost = Unitary Variable cost x Qty
the suggested selling price is TVC = $0.30 X 400
TVC = $120 per month
$1,00 per cookie. They plan on
selling 400 cookies per month Total Cost = Total Fixed cost + Total Variable Cost
Total Cost = $ 200 + $120
Calculate: Total Cost = $ 320

+ The Total variable Costs Total Revenue = Price x Qty

Total Revenue = $1 x 400
+ The Total Cost Total Revenue = $400
+ The Total Revenue
16
 References:
Slide 5 Image: https://www.thinkib.net/businessmanagement/page/44487/types-of-costs

Slide 7 & 8 Image: https://www.thinkib.net/businessmanagement/page/44487/types-of-costs

Slide 13 Image: https://www.toppr.com/ask/question/total-revenue-is-a-straight-positively-sloping-line-having-a-constant-slope-from-origin-under

Slide 15: All images from Microsoft Bing

Slide 16; T Unknown author is licensed under CC BY.

17